Graham and Dodd, first edition, is 700 pages of text and appendices. Wouldn't it be simpler to buy a basket of good stocks, say the Dow Jones list, and hold on for a generation? In fact I can nowadays hire an index fund administrator to do that for me, for a very modest fee.

The answer is, I think, implicit in the graph on page 2 of SA1, which shows for 1897 to 1934 the monthly high and low of DJIA stock average. You can see the chart begin in 1897 at about 41, go up, go down, hitting highs every so often: 77, 78, 103, 100, 94, 110, 119, 103 with lows in between: 52, 42, 53, 73, 72, 53, 65, 62. Then in 1923, after a high of 103 which one might expect would be followed by another low in the 40-75 range, instead the index goes up, an exponential curve, peaking in 1929 at 381, then dropping over the next 3 years until in 1932 the DJIA reaches... 41, which is where the chart began in 1897. In 1933 it's back to a low of 50 and a high of 108.

If a person in 1897 were planning to invest for a generation, and could look forward to see the DJIA in 1933, he would not be greatly disappointed. From the perspective of 1897 a Dow in the range of 50-108 in 1933 appears normal; good dividends might be expected, and perhaps some capital gains if one sells wisely in 1933. If that investor had more detailed foreknowledge he might plan to sell earlier, say at 110 in 1916 or even at 119 in 1919. Seeing the entire pattern of advances and declines, aside from 1923-1929, the 1897 investor would find nothing unusual. It is the long runup in 1923-1929 that would appear out of the ordinary, could that 1897 investor foresee it.

A static Dow is not such an old thing. The DJIA from 1965 to 1982 advanced less than 1 pct. Although an index investment (via a fund or self constructed) may be simple to manage, it may not be profitable.

Advances and the declines are not randomly distributed among all issues, but depend upon the companies and their businesses. Graham and Dodd illustrate this point on pp 81-82 of SA1 where they list the 18 NYSE industrial companies, out of more than 200 companies, whose bonds maintained a strong credit rating throughout 1932 and 1933.

That raises the question whether good selection of one's investments could preserve or even grow value?

But, it is not sufficient to select based only upon an analysis of the company and its business. One must also look at the particulars of the security. That is illustrated on SA1 pp 187-188, which describes the fate of Westvaco Chlorine Products bonds and common. The bonds were guaranteed by Union Carbide and Carbon, not only for interest but via a plan of continuous purchases for retirement, and kept their value (99 or higher) throughout 1932-33, whereas the common declined from 116 in 1929 to 3 in 1932.

The conclusion: Security analysis is a necessity. If one does not do it oneself, and does not have a fund manager who does it, the hazards of investing can be very great. Given the current tendency of many fund managers to either explicitly or implicitly attempt to follow the indexes (the crowd), one will have to find a fund manager with great independence and steadiness. Those people are rare. Or one must be prepared to do the work oneself.

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